Judge: Bruce G. Iwasaki, Case: 23STCV22692, Date: 2024-06-06 Tentative Ruling

Case Number: 23STCV22692    Hearing Date: June 6, 2024    Dept: 58

Judge Bruce G. Iwasaki

Department 58

Hearing Date:             June 6, 2024

Case Name:                Holy Roly Holding Inc. v. Holy Roly Melrose LLC  

Case No.:                    23STCV22692 [r/t 23STCV22750]

Motion:                       Demurrer

Moving Party:             Defendants Holy Roly Melrose LLC, and Yuekuo Ding

Opposing Party:          Plaintiffs Holy Roly Holding Inc., LKZ Enterprises, Inc., and Seung Jun Kim aka Louis Kim

            This case arises from an alleged breach of a franchise agreement. Plaintiff Holy Roly Holding Inc. (Holy Roly Holding), LKZ Enterprises, Inc. (LKZ), and Seung Jun Kim (Kim) operate an ice cream chain, Holy Roly. The pleadings allege that Defendants Leo Zhou (Zhou) and Tag USA Consulting, Inc. (Tag) approached Plaintiffs with a plan to operate a franchise of Holy Roly. Relying on representations of Zhou and Tag’s experience in franchising businesses, Plaintiffs paid Zhou and Tag $7,000 to franchise the business, including to obtain an investor – in this case, Defendant Tue Kuo Ding (Ding). Thereafter, Plaintiffs entered into a written franchise agreement for Defendant Ding to operate a Holy Roly ice cream store in Los Angeles County, Defendant Holy Roly Melrose, LLC. Pursuant to the terms of the Franchise Agreement, Defendants Ding and Holy Roly Melrose, LLC were to pay 4% annual gross sales to Plaintiff Holy Roly Holding as a franchise fee, 2% of gross sales for advertising fees, and the sum of $250,000 in exchange for 90% ownership of Holy Roly Melrose.

            Defendant Ding hired Plaintiff Kim to assist in operating and managing Holy Roly Melrose, LLC for him until he obtained his E-2 visa and came to the United States. Ding also promised to pay Kim a management fee in the form of a monthly salary in the amount of $1,500 per month or 4% of gross sales, whichever was more. The Complaint alleges that Ding only intended to use Plaintiffs to obtain his E-2 visa to immigrate to the United States. That is, once Defendant Ding was able to obtain a visa, he stopped paying the franchise fees and management fees to Plaintiffs and refused to pay Plaintiff Kim for the work he performed.

            Based on certain representations, Defendant Ding also induced Plaintiffs to make loans to Holy Roly Melrose in the amount of $350,000.

The operative First Amended Complaint contains causes of action for: (1.) breach of contract (franchise agreement); (2.) common counts: account stated; (3.) common counts: open book account; (4.) breach of oral agreement; (5.) restitution; (6.) intentional misrepresentation; (7.) negligent misrepresentation; (8.) failure to pay minimum wage; (9.) failure to pay overtime wage; (10.) failure to provide rest period; (11.) failure to provide meal period; (12.) failure to provide wage statements; (13.) unfair business practices; (14.) indemnification; (15.) breach of oral agreement; (16.) unfair business practices; and (17.) negligence.

            On May 3, 2024, Defendants Holy Roly Melrose and Ding (Defendants or Demurring Defendants) demurred to all seventeen causes of action in the First Amended Complaint. Plaintiffs opposed the demurrer.

            The demurrer to the First Amended Complaint is overruled.

Demurrer

            A demurrer is an objection to a pleading, the grounds for which are apparent from either the face of the complaint or a matter of which the court may take judicial notice. (Code Civ. Proc., § 430.30, subd. (a); see also Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The purpose of a demurrer is to challenge the sufficiency of a pleading “by raising questions of law.” (Postley v. Harvey (1984) 153 Cal.App.3d 280, 286.) “In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.” (Code Civ. Proc., § 452.) The court “ ‘ “treat[s] the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law . . ..” ’ ” (Berkley v. Dowds (2007) 152 Cal.App.4th 518, 525.) 

Analysis

Standing Based on the California Franchise Investment Law:

            Defendants demur to the entire FAC on the grounds that Plaintiffs lack standing under the California Franchise Investment Law (CFIL) to bring any claims because they failed to plead the validity of the Franchise Agreement.

            As a preliminary matter, Defendants demur to the first through seventeenth causes of actions on the grounds of non-compliance with CFIL. However, Defendants provide no legal authority that a failure to comply with CFIL bars any of the specific claims pled, particularly the tort claims.

            Specifically, Defendants cite Dameshghi v. Texaco Refining & Marketing, Inc. (1992) 3 Cal.App.4th 1262, which they argue stands for the proposition that individual plaintiff who was not a franchisor was not “entitled to access to the courts” for purported CFIL violations. Defendants also cite BP Products North America Inc. v. Grand Petroleum, Inc. (N.D. Cal., Oct. 14, 2021, No. 4:20-CV-0901-YGR) 2021 WL 4804275 for the proposition that individuals who were not parties to the franchise agreements cannot bring CFIL challenges. (Id. at *5, fn. 6.)

Neither case is persuasive regarding the allegations here. Contrary to the demurrer, the causes of action do not “rest on the assertion that Plaintiff is a lawful franchisor under the CFIL.” The FAC does not contain any cause of action for statutory CFIL violations. Moreover, the standing arguments cited by Defendants in BP Products North America Inc. v. Grand Petroleum, Inc. arose under the federal Petroleum Marketing Practices Act, 15 U.S.C.§ 2801 et seq. – not the CFIL. This entire legal argument lacks merit.

            Further, Defendants’ argument that the Franchise Agreement is invalid because it fails to comply with certain Franchise Rules is also unpersuasive. They argue that Plaintiffs have failed to plead that they have satisfied the requirements for mandatory disclosure and registration under the CFIL. But Defendants provide no legal authority for requiring such a pleading for the causes of action pled. Thus, the demurrer on this ground is also not well-taken.

            Moreover, to the extent that Defendants assert that Plaintiffs have not complied with the Franchise Rules, such an assertion is outside the allegations in the pleading. (Dem., 3:18-4:5.) Such an argument is inappropriate on demurrer.

            Instead, here, the FAC alleges that a franchise agreement existed between Plaintiffs on the one hand, and with Holy Roly Melrose and Ding – as the alter ego of Holy Roly Melrose. (FAC ¶¶ 15, 55, Ex. 1 [Franchise Agreement].) The pleadings further allege specific breaches of this agreement. (FAC ¶¶ 55-58.) The demurrer to the first cause of action for breach of franchise agreement is overruled.

            Defendants argue that the second through fifth causes of action by Plaintiff LKZ against Defendant Ding and HR Melrose fails because Plaintiff LKZ is not a party to the Franchise Agreements at issue. The opposition does not address this argument. However, the second through fifth causes of action are not based on the franchise agreement or its terms. (FAC ¶¶ 59-76.) Thus, this argument is not well taken.

            The demurrer based on this standing argument is overruled.

Sixth and Seventh Causes of Action for Misrepresentation:

            Defendants demur to these causes of action on the grounds that “no franchise contract was formed because of noncompliance with the CFIL. Without a determination that a lawful franchise existed, Plaintiffs’ complaint and all causes of action, including the employment claims (Kim hired himself) and loans, fail to state a cause of action.” (Dem., 5:12-16.)

            Defendants cites no legal authority for this argument. The Court rejects this wholly unsupported argument.

Defendants also argue that these misrepresentation claims fail because “(i) they are not based on statements of fact; (ii) Plaintiffs’ claims contradict the alleged Franchise Agreement, and/or (iii) Plaintiffs fail to show Defendants willfully made untrue statements of material facts and (iv) the First Amended Complaint fails to allege that the alleged misrepresentations or omissions concern material facts and/or fails to allege willful misconduct or omission by Defendants.” (Dem. 4:14-20.) These argument are entirely conclusory with no analysis of the allegations pled. The demurrer as to these undeveloped arguments is overruled.

Eighth through Twelfth Causes of Action:

Defendants demur to Plaintiff Kim’s eighth through twentieth causes of actions under the Labor Code on the grounds that Plaintiff Kim has failed to exhaust his administrative remedies.

            Specifically, Defendants contend that Plaintiffs were required to comply with the statutory prerequisite for commencing a civil action under PAGA and the Labor Code. However, Plaintiffs have not brought any claims under PAGA. Thus, Plaintiffs need not comply with any statutory prerequisites before bringing their individual Labor Code claims.

            Defendants also argue that Plaintiff Kim is the owner of the Franchisor and cannot assert wage and hour claims. However, the FAC also alleges Plaintiff Kim acted as an employee. Thus, the wage and hour claims do not arise from his position as the franchisor.

            The demurrer to these causes of action is overruled.

Fourteenth through Seventeen Causes of Action:

            Defendants argue that the fifteenth through seventeenth causes of action by Plaintiffs against Zhou and Tag fail because Plaintiffs lack standing to sue under the Franchise Agreement.

            In opposition, Plaintiffs note that the fourteenth through seventeen causes of action are not brought against the Demurring Defendants; as such, Demurring Defendants have no standing to demur to these causes of action.

            The demurrer to these causes of action is overruled.

Conclusion

            The demurrer to the First Amended Complaint is overruled.  The Court finds that Defendants’ arguments are so lacking in legal support that they appear frivolous and interposed for an improper purpose.  If a separate motion under Code of Civil Procedure section 128.7 had been properly made, the Court would have considered imposing monetary sanctions against Defendants and counsel.

            Defendants shall file and serve their Answer to the First Amended Complaint on or before June 27, 2024.